Medina Reyna Juan Manuel

Juan Manuel Medina Reyna Finanzas 1555

Wall Street Staggers What brought down the markets? In times of high stress, many in the financial world seek solace in watery metaphors. We hear of vast irresistible forces converging in "perfect storms" and unforeseeable events contributing to "100year floods." How could we have expected, let alone prevented, this? Count on Warren E. Buffett to cut to the truth. Years ago, referring to reckless corporate debt, Buffett noted (or so the story goes): "You never know who is swimming naked until the tide goes out." The tide's moving, and we're starting to get the full, not-so-pretty view. Along with the bare swimmers emerging from the soggy murk, we're being reminded of some of the dumb ideas and reckless choices that helped deliver us to our current debacle. As stunning as the scene seems, we've actually had plenty of experience with this sort of thing. But like some stubborn residents of hurricane zones, we swiftly choose to forget the last tempest and reassure ourselves that things will be different from now on. Why don't we learn the obvious lesson to the contrary? Answers: the timeless power of hubris during periods when profits seem easy, and a set of foolish financial notions that have become prevalent over the past three decades. One of those beliefs is the indiscriminate antiregulatory ideology one hears preached on Wall Street with tent-revival fervor. What makes this thinking so perplexing is that many of the free-market true believers also assume the federal government will save them if they flop. Consider the extraordinary taxpayer-backed rescues of insurance titan American International Group (AIG), housing financiers Fannie Mae (FNM) and Freddie Mac (FRE), and, before those, the Treasury-guided merger of Bear Stearns into JPMorgan Chase (JPM). It brings to mind the homeowner who rants about getting Washington off his back but wants federally guaranteed flood insurance no matter how close to the Gulf Coast he builds his house. Other by-now-familiar attitudes have helped put us in the drink: In good times, there's no such thing as too much leverage. (Remember Michael Milken?) Derivatives don't require oversight, even though almost no one understands them. (How now, Long-Term Capital Management?) And, don't worry, the quantitative geniuses have devised models to eliminate extreme risk. (Enron, anyone?) "Now, again, the banks and the Bush Administration and [Treasury Secretary Henry] Paulson and [Federal Reserve Chairman Ben] Bernanke would like you to think these crises are like floods or hurricanes," says Michael Greenberger, a senior official at the Commodity Futures Trading Commission (CFTC) during the Clinton Administration. An advocate of more aggressive regulation of investment banks, he was shot down in the late 1990s by Democratic colleagues, not just GOP foes. Most financial calamities aren't like natural forces beyond control, Greenberger says. "These are predictable events." Predictable events, of course, are more likely to be prevented with sound rules and stiff enforcement. Different Animals Alfred E. Kahn offers the long view—a very long view. As the Carter Administration's aviation czar, he unshackled airline routes and fares in the late 1970s, reshaping that industry (for better and worse) and helping spur a lengthy era of economic deregulation. Still sharp at 91, the retired Cornell University economist and part-time consultant recalls that almost as soon as the free-market spirits were set loose, a furious stampede ensued. Lenders, for one, demanded lots more freedom. But they "were a different kind of animal" from airlines and trucking firms, which the Carterites also

Juan Manuel Medina Reyna Finanzas 1555 deregulated, Kahn says. "They were animals that had a direct effect on the macroeconomy. That is very different from the regulation of industries that provided goods and services. I never supported any type of deregulation of banking." During the Reagan years, Kahn's cautious industry-by-industry analysis was replaced by the allencompassing antiregulatory ideology of the University of Chicago. One result: the liberation of an armada of savings and loan pirates, abetted by congressional Democrats as well as Republicans, many of them drunk on S&L campaign largesse. (Wall Street lobbyists with open wallets have since perfected the practice of neutralizing Congress on a bipartisan basis.) Hundreds of thrifts ultimately collapsed in the late 1980s and 1990s amid greedy and, in some cases, fraudulent real estate deals. As early as 2000, William J. Brennan, a prominent consumer attorney who has represented mortgage borrowers since the S&L catastrophe, warned in testimony before the House Financial Services Committee that real estate finance would return in new guises to haunt us. Few listened. Behind every burst of ill-advised lending lurk financial innovators creating new mechanisms to entice ever-more-sketchy borrowers, says Brennan, the director of Atlanta Legal Aid Society's Home Defense Program. In the 1980s, Michael Milken and his comrades at the now-defunct Drexel Burnham Lambert investment bank exacerbated the S&L fiasco by hawking their thrift clients' highrisk junk bonds. More recently the likes of soon-to-be-defunct Lehman Brothers and Bear Stearns engineered the securitization of mortgages, encouraging home lenders to spew wildly unwise loans. "Lending without regard [for] the ability to pay back started with the S&L scandal," says Brennan. In the 1980s the borrowers were reckless shopping-mall developers; in the recent boom, unsophisticated and sometimes cavalier homeowners. Wall Street transformed dicey subprime mortgages into the toxic securities that have required hundreds of billions in writedowns and that drove once-mighty Merrill Lynch (MER) to sell itself to Bank of America (BAC). One of the most striking aspects of the current turbulence is the degree to which banks invested in the noxious fare themselves, notes Emanuel Derman, who heads risk management at Prisma Capital Partners, a hedge fund in Jersey City, N.J. "These guys ate their own cooking; they didn't just pass it on to clients." The outsize appetite on Wall Street for hazardous mortgage-backed securities and even more obscure derivatives has had a lot to do with the people in the kitchen failing to understand fully what was in their recipes. All of this is painfully familiar to anyone who paid attention to past adventures with wizards who claimed their esoteric models had magically eliminated risk and uncertainty. Hedge fund Long-Term Capital Management (LTCM) couldn't imagine Russia defaulting on its debt, much as Lehman apparently couldn't conceive of housing prices across the country deteriorating simultaneously, followed by a paralyzing credit crunch. For four years in the mid-1990s, LTCM boasted extraordinary profits based on supposedly flawless computer formulas devised by a team that included two Nobel laureates. But in the summer of 1998, Russian credit disintegrated, one of several concurrent global shocks that the LTCM crew had failed to factor into their algorithms. After losing more than $4 billion in a few months—in retrospect, the amount seems almost quaint—the hedge fund received a federally organized rescue, although it later shut down altogether. Financial "rocket scientists," says Henry T. Hu, a corporate law professor at the University of Texas in Austin, have a knack for neglecting low-probability, catastrophic events. The smartest guys in the room at Enron similarly assumed away risks they didn't want to confront. "These models…work in normal circumstances but not during times of market stress, when it really matters," Hu says. "It is almost like a safety belt that only fails in a serious car crash." One of the things that dismayed outsiders about LTCM after it came apart was the size and complexity of its derivatives portfolio. Some in the Clinton Administration pushed for more oversight

Juan Manuel Medina Reyna Finanzas 1555 of the unregulated, privately traded instruments whose value derives from price shifts in currencies, securities, or other assets. Then-Fed Chairman Alan Greenspan, allied with Robert E. Rubin, Clinton's Treasury Secretary (and now a director and senior counselor at Citigroup (C), opposed tougher policing of derivatives. Banks could watch over each other more effectively than regulators could, Greenspan argued. This turned out to be shortsighted. In an interview, Greenspan doesn't back down, even after all we've seen lately. "The majority of lawyers, in my experience, seek to regulate—that is, to contain certain activities with little weight given to the lost benefits of such activities," he says. "The question is: What do you lose? In this case, a very valuable instrument [credit default swaps, the derivatives at the core of the current mess] for the diminution of systemic risk. You can stop the system dead and eliminate speculative losses. But you will also get significantly reduced economic activity and ultimately lower standards of living." Greenspan adds: "I've been extraordinarily distressed by how badly the most sophisticated people in the business handled risk management. But the question is: If, protecting their own resources, they can't do it, who's going to do it better?" (Well, maybe regulators who don't have big bonuses at stake would be less likely to get carried away by the euphoria.) Rubin says separately that he didn't oppose the general idea of scrutinizing derivatives, but instead argued against particular proposals in the late '90s to expand CFTC authority. "I have always been concerned about derivatives," he says. Michael Greenberger served as the CFTC's director of trading and markets at the time. A proponent of tougher oversight, he recalls the Greenspan-Rubin resistance as being fierce and across-theboard. "If we had prevailed, the [subprime-securitization] party would never have gotten started; the wildness wouldn't have happened," he says. "There would have been auditing requirements, capital requirements, transparency. No more operating in the shadows. Bear Stearns, Lehman, Enron, and AIG would be thriving, and spending every waking hour complaining about regulatory restraints imposed upon them." Now a law professor at the University of Maryland, Greenberger adds: "In a booming economy, people couldn't be convinced that without corrections, LTCM would happen again—bigger and with more ramifications." Today, Bear, Lehman, and AIG have untold amounts of outlandish derivatives on their books. It could be years before anyone untangles what they're worth. One other legacy of LTCM is "moral hazard": the prospect that other financial actors would take greater risks because at some level they'd assume that they, too, would be considered "too big to fail." Surely one can surmise that Fannie Mae and Freddie Mac overstepped in part because of an implied federal safety net that turned out to be a very real one. Edward S. Lampert, the hedge fund tycoon who controls Sears Holdings (SHLD), worries about yet another twist. He says the current wave of federal intervention sends the opposite signal from what's intended: that officials are panicking because of broader instability. "As an investor, that was my immediate reaction" to the Fannie and Freddie moves, he says. "They completely destroyed confidence in any financial institution." Lampert frets that with investment banks failing and merging, the resulting consolidation will concentrate risk and invite more rescues. "You are going to have Citi, JPMorgan, and Bank of America with $2 trillion-plus in assets each," he notes. "That's three times the size of Fannie and Freddie. Now if they end up with problems, what do you think is going to happen? They are too big to fail."

RESUMEN DEL ARTICULO “¿Qué hizo caer a los mercados?”

Juan Manuel Medina Reyna Finanzas 1555 En tiempos de mucho estrés, el mundo financiero busca alivio en ciertas metáforas acuáticas. Es así como aprendemos sobre fuerzas irresistibles que convergen en “tormentas perfectas” o sobre eventos impredecibles que desatan “inundaciones cada cien años”. Una de estas metáforas fue inventada hace un tiempo por Warren E. Buffett, cuando dijo, a propósito de la deuda corporativa, que “nunca se sabe quién está nadando desnudo hasta que no baja la marea”. Ahora la marea está bajando y estamos empezando a ver un panorama poco atractivo. Aparte de los bañistas desnudos, estamos recordando las tontas ideas y las malas decisiones que nos llevaron a esta debacle. Aunque la escena nos resulte increíble, ya teníamos mucha experiencia en este tipo de situaciones. Pero, como si fuéramos los tercos residentes de las zonas arrasadas por huracanes, volvemos a olvidar la tempestad y nos convencemos de que todo será diferente de ahora en adelante. ¿Por qué nunca aprendemos la lección? La respuesta está en el frenesí que despiertan los períodos de prosperidad, así como unas cuentas nociones financieras erradas, que han prevalecido durante las tres últimas décadas. Una de estas nociones es el rechazo absoluto que profesa Wall Street hacia cualquier tipo de regulación. Pero lo más asombroso es que los verdaderos partidarios de un mercado libre son los mismos que asumen que el gobierno federal los debe ayudar en los malos tiempos. Tomemos por ejemplo el rescate financiero (pagado por los contribuyentes) a compañías como: AIG, Fannie Mae y Freddi Mac, entre otros. Estos casos recuerdan al propietario que no quiere tener a Washington a las espaldas, pero quiere garantías federales independientemente de lo cerca que esté su casa de la costa del Golfo de México. Otras actitudes que han contribuido a la actual debacle son: “en los buenos tiempos nunca hay demasiados riesgos”; “los derivados financieros no necesitan supervisión, si bien casi nadie los entiende”; y, finalmente, “no te preocupes, los genios financieros han hallado un nuevo modelo que elimina los riesgos extremos”. En este caso, “los bancos, el gobierno de Bush, el secretario del Tesoro, Henry Paulson, y el presidente de la Reserva Federal, Ben Bernanke, nos quieren hacer creer de nuevo que estas crisis son como inundaciones o huracanes”, señala Michael Greenberger, ex funcionario del área de finanzas en el gobierno de Clinton. Pero la mayoría de las calamidades financieras no responden a fuerzas naturales que están más allá de nuestro control. Según Greenberger, “estos son eventos predecibles. Y los eventos predecibles se pueden prevenir sólo si se implementan leyes adecuadas”. http://www.businessweek.com/magazine/content/08_39/b4101000869093.htm Publicado en Septiembre 29, 2008 en la revista Business Week.